In the job market of the early 21st Century, when job engagements tend to last an average of less than four years, the likelihood of serving a single employer until retirement is in swift decline. The global business model, enhanced by rapidly developing technological advancement, has fueled a dramatic shift in how employers market their products and services today.
This dynamic in job morphing leads many former corporate professionals to consider starting their own business, where they can better control their own job security, financial success and quality of life. This shift to self-reliant entrepreneurship has created a burgeoning service-oriented industry, and inspires thousands each year to consider taking the big step.
There are many benefits enjoyed by the self-employed in terms of a stable income, sense of accomplishment, partnering with a spouse, and often creating a family business legacy, by including children or grandchildren. The range of business opportunities is truly unlimited. Consulting in your field of expertise or interest, purchasing a franchise, starting a new business, or buying an existing business, can lead to great satisfaction and personal achievement.
The United States today is home to nearly twenty five million small businesses. Most are in the service sector, and the proportion of women-owned small businesses in approaching fifty percent. We think of America as a country of huge corporations, when actually only one percent of U.S. businesses have more than five hundred employees and the Fortune 500 companies account for less than 5% of the workforce. Micro-businesses, with one to four employees, are the largest job creators today, and were far less impacted by the most recent recession by readily redeploying workers rather than jettisoning them altogether.
When considering whether to start your own business, there are two recommended initial steps to determine whether self-employment is right for you. The first step is to assess your values and beliefs in the work place, and how those transfer into operating your own business. DBM clients have access to the Self Employment Profile, which will help you understand how you could fit into the world of entrepreneurism. Whether you use this tool, or another, it is essential that you gather data about yourself to help you understand your transferable strengths, and perhaps more importantly, where you need support.
The second key step to making this transition is to have an understanding of the time it will take to research, evaluate, research, and then research the market as broadly and as inclusively as you can, identify your niche. Research the market with target of ten or less opportunities. Narrow your search to the three that look most promising, and research those until you identify the one opportunity you choose to pursue. According to the Small Business Administration, successful small businesses spend six to ten months planning their business before taking it to the marketplace. Startups that plan for four months or less usually fail within the first two years.
A thorough understanding of risk associated with your business is an essential part of the planning process, and will help you decide which kind of legal entity your new business needs to be. Sole proprietorship, partnership, Limited Liability Corporation, or Full Corporation are all possibilities. Perhaps it will make sense to start your business as one form of legal entity and then, at some milestone, move it into another form determined by your milestone, which might be volume of business or increasing risk associated with your growth.
The factors to consider in making the decision on the proper legal entity for you business are many, but most of us focus on two key elements; taxes, and liability. Taxation as a sole proprietor, and in most cases a partnership, are fairly simple. At the end of your business year, usually the calendar year, you simply determine your annualized profit or loss and report it on your federal and state tax return where you pay tax on your profits.
As a corporation, your business will have more stringent tax reporting schedules, and for a profitable small business, can result in paying taxes twice on your earnings; once as the corporation, and then again on what you take out of the business as salary. In my own experience, I have learned that the best way to make a Subchapter S Corporation to work for me is to have someone else, an accountant, handle all the tax reporting requirements, which frees me up to focus on the task of growing my business and delivering good service quality.
A corporate structure traditionally has expressed limited liability protection for the owner-officers, often referred to as the Corporate Veil of Protection. However, when the courts find “fuzziness” between corporate assets and owner assets, the Veil of Protection is pierced and owner assets are “attached” to the corporate liability, often resulting in the owner-officer exposing and losing all private assets as well.
The Limited Liability Corporation (LLC) is a relatively new addition to the type of business entities recognized by the U.S. government. The LLC is not available in every state, as some states are still struggling with how to structure this type business entity. The attraction of the LLC is that it provides more protection for the operators of the business from liability than a sole proprietorship or partnership, but doesn’t have the strict taxation rules of the full corporation. It is important, however, to investigate what limitations of liability are in your state’s definition of the LLC, and also how the rules of business have been defined.
Because corporations protect the officers’ personal assets in a litigable action against the company, if the officers have acted in good faith, it is only the assets of the corporation that are at risk in a legal action. This isn’t true in a sole proprietorship or partnership, as the assets of the individuals operating the business will be at risk.
Determining what your present and future risks are going to be in your business will help you make decisions about the type of legal structure you need for your business, and the steps you must take to ensure you are personally protected in case of legal action. This is a good time to make use of other resources to help you make these decisions. Look in your area for a Small Business Development Center sponsored by the U.S. Small Business Administration (Canada Business Service Centre in Canada). You’ll find these located in proximity to universities, and offer detailed advice and research resources to help you understand more about your options.
If you haven’t explored one of these SMDC (or CBSC) resources to date, you will be delighted with the information they have available to you, including, in many locations, SCORE (Service Corps of Retired Executives). Most services are free at these locations, and those that have a fee attached are usually much less than you would expect to pay a consultant. You can find the location of the Business Center or Service Center near you by going these organizations’ websites: Small Business Administration is http://www.sba.gov and Canada’s Business Centres Network is http://www.cbsc.org.
According to the Small Business Administration, one of the common characteristics of a successful small business is that they use outside advisors to help identify all the dynamics that need to be part of the planning process. These outside advisors may come from a number of business sectors, such as a commercial banker, a business broker, a franchise broker, a small business attorney, CPA, commercial insurance agent, and other successful business owners. The benefit is that you will get feedback on your ideas to help guide your decisions in those critical startup years.
Another key element to success in your start up business is networking. Yes, networking! Getting out in the business community to expand that circle of folks who know you and your business. Face to face meetings are best, of course, closely followed by memberships in chambers of commerce, business associations and professional networking groups.
One of the reasons you will spend six to ten months planning your business is that it will take that long to do your market research. It is essential that your thoroughly understand the demographics and make up of your potential customer base. Much of this information can be obtained through resources like SBA, libraries, the Internet, associations, interviews with prospective clients, and business networking. The goal is to understand your target market as well as possible.
Our search page for entrepreneurs provides excellent tools to help you begin this process of investigating going into business for yourself. Ranging from links to Self Employment Assessments to Entrepreneurial websites, you have the resources at your fingertips to begin successful business planning. To expand your knowledge and comfort level further, you should plan to spend a day at a Small Business Administration “Small Business Development Center,” or Canada Business Service Centre, to explore the myriad services available to small business and entrepreneurs.